Netco, Inc. v. Dunn, No. 26064 (MO 4/15/2005)

• Decision Date: 15 April 2005
• Docket Number: No. 26064,26064
• Parties: NETCO, INC., et al., Respondents, v. JIMMY DUNN, et al., Appellants.
• Court: Missouri Supreme Court

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NETCO, INC., et al., Respondents, v. JIMMY DUNN, et al., Appellants.

No. 26064

Court of Appeals of Missouri, Southern District, Division Two.

April 15, 2005

Appeal from the Circuit Court of Greene County, Missouri, Honorable J. Miles Sweeney, Judge.

Larry Bratvold, Robert B. Hankins, Gaspare J. Bono and Ray M. Aragon, for Appellants.

R. Dan Boulware, R. Todd Ehlert & Sharon Kennedy, for Respondents.

Robert S. Barney, Judge.

This cause of action arises out of the business relationship between Appellants¹ and Respondents Netco, Inc. ("Netco") and Schmitz & Associates, Inc. ("Schmitz Associates") (collectively "Respondents"), both owned by Charles and Kim Schmitz ("the Schmitzes"). The parties' dispute arises from their participation in a network of business organizations called Pro Net Global Association, Inc. ("Pro Net").

To better understand our analysis of Appellants' points relied on, it is necessary that we recite certain evidentiary matters as revealed by the record.

The record reveals that the parties' relationship is based on their involvement with Amway. Amway, now known as "Alticor" or "Quixtar," is a multi-level marketing business which sells consumer goods through a vast network of independent distributors. These Independent Business Owners ("IBOs") merchandise products directly to consumers, not in fixed retail stores.

The Amway business structure and the distribution of its products is governed by the Amway Rules of Conduct ("Rules of Conduct"), to which each Amway distributor is required to subscribe in its initial "Distributor Application."²

With each IBO acting as an independent contractor, Amway employs a pyramid-like structural hierarchy. Every IBO is in charge of building and managing its own sales force by recruiting and sponsoring new distributors, who are then supplied and trained to sell Amway products.

IBOs are compensated by receiving a percentage of the sales from their entire sales pyramid as well as from earnings derived from their own sales to retail customers. The distributorships that occupy positions below a particular IBO in each branch of the Amway network are referred to as that IBO's "downline." As such, an IBO's downline includes those persons the IBO personally sponsors, as well as people whom those below them sponsor. Conversely, those distributorships that occupy positions in the network above a given IBO are referred to as that distributorship's "upline." These positions are determined by the essential Amway concept of the "line of sponsorship." Amway distributors are instructed that respect and observance of the line of sponsorship is mandatory; that they should support and edify their upline distributors; and, that their upline distributors are there to teach and support them.

With that being said, the present matter does not directly involve the purchase or sale of Amway products. Instead, this matter relates to the parallel business of selling Business Support Materials ("BSMs") to Amway distributors.

IBOs use these non-Amway produced BSMs, called "tools" and "functions," as a way to train, guide, and motivate their downline sales force. "Tools" are sponsoring and merchandising aids, such as audio and video tapes, literature and flip charts. Similarly, "functions" are educational seminars, rallies, and other meetings conducted by distributors for others in their line of sponsorship.

The use and distribution of these independently produced BSMs "are entirely optional;" are "strictly voluntary;" and, "must comply" with specific provisions of the Rules of Conduct.

In the present matter, the Schmitzes originally became involved with Amway in 1984. In 1990, they incorporated Netco, and assigned their interest in their Amway distributorship to Netco.³ The Schmitzes also operated their non-Amway "tools" business through Netco.

In 1992, the Schmitzes formed Schmitz Associates, a corporation which facilitated their "functions" business.⁴ Schmitz Associates "operated in tandem with Netco to build, support and enhance the Amway business."⁵

During the fifteen years that the Schmitzes were involved with Amway, they personally sponsored fifty-three Amway distributors, had a network of over eight thousand downline distributors, and reached the exclusive "diamond" level of leadership within Amway.⁶

In 1998, Pro Net was formed as an organization "to facilitate the sale of Amway-related [BSMs] by its members." Pro Net proposed that Pro Net members would transfer to Pro Net the copyright and intellectual property rights in the BSMs they produced. Pro Net would, in turn, make the members' tapes available for sale and distribution to all other Pro Net members. Pro Net contracted with Appellant Global to fill the orders of its members and distribute the BSMs.

The founding members of Pro Net, most of whom are Appellants herein, were Respondents' upline distributors within the Amway line of sponsorship.⁷ As such, the Pro Net founding members invited the Schmitzes to join Pro Net. As a result, the Schmitzes attended a conference given by Pro Net in Myrtle Beach, South Carolina, in May of 1998, at which time they were formally invited to join the organization and were advised of the terms and conditions of membership.

Thereafter, on December 9, 1998, Schmitz, on behalf of Netco, signed a "Pro Net Global Association Membership Application," and submitted the form to Pro Net.⁸ Though he paid the twenty-five dollar application fee, Schmitz wrote on the application: "I sign this with the understanding that I am not giving up my right to buy-sell or produce support materials from other suppliers or manufacturers. *As per phone conv [sic] with Paul Brown 12/8/98 /s/ CH."⁹

Attached to the Pro Net Membership Application submitted by Schmitz were the Pro Net Terms and Conditions. The Pro Net Terms and Conditions included the statement that "[m]ember agrees to adhere to the Amway Corporation's Code of Ethics and Rules of Conduct for distributors, the Association's Bylaws" and "[m]ember agrees to refrain from using [BSMs] unless they have been approved by the Association."

In addition, Paragraph 11 of the Pro Net Terms and Conditions contained an alternative dispute resolution provision applicable to all members:

Any dispute, controversy, or claim arising out of, relating to, or concerning the interpretation or performance of the contract created by acceptance of the Membership Application, or the breach thereof, or any dispute, controversy, or claim between one or more members of the Association or between the Association and any of its members which cannot be resolved through negotiation . . . shall be submitted to mediation administered by the Association. Each party to the dispute shall name a mediator who shall be an Association Member at the diamond level or higher of Amway. Upon the selection of two mediators, the two chosen mediators shall select a third mediator who shall be an Association Member at the diamond level or higher of Amway. If agreement is not reached by the parties by mediation, any Dispute shall be submitted to and settled by binding arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules in effect at that time, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction . . . .

According to Gooch, who was a founding member of Pro Net, the above dispute resolution clause was added to the Pro Net Terms and Conditions because "Amway had just incorporated an arbitration provision in its rules and that [Pro Net] wanted to follow the same approach."

On June 27, 2000, Respondents Netco and Schmitz Associates filed suit against Appellants alleging, inter alia, that Appellants "primary objectives were to monopolize, control and manipulate the tool and function business, ignore and circumvent the essential `lines of sponsorship' in the BSMs business, to boycott [Respondents], to impair [Respondents'] networks of downline distributors and to convert [Respondents'] tool and function business to their own pecuniary benefit and advantage . . . ."¹⁰

Respondents subsequently filed their "First Amended Petition" alleging twelve counts of liability against Appellants: tortious interference; promissory estoppel; fraudulent misrepresentation; negligent misrepresentation; "Breach of Implied-in-Fact Contract Concerning the Tool Business;" "Breach of Duty of Good Faith and Fair Dealing Concerning the Contract Governing the Tool Business;" "Breach of Implied-in-Fact Contract Concerning the Function Business;" "Breach of Duty of Good Faith and Fair Dealing Concerning the Contract Governing the Function Business;" unlawful pyramid scheme; "Antitrust Violation — Conspiracy to Monopolize;" "Antitrust Violation — Group Boycott;" and, "Antitrust Violation — Price Fixing and Allocation of Customers."

As previously related, in response to Respondents' claims, Appellants filed a motion to compel arbitration and stay the proceedings.¹¹ In a four-line "Order," the trial court denied Appellants' motion to compel arbitration and stay litigation, to-wit:

NOW, on this 22nd day of January, 2004, it is ORDERED that, after consideration, [Appellants'] Motion to Compel Arbitration and Stay Litigation and [Appellants'] Motion for Rehearing are hereby denied. The Court orders the parties to mediate the case within ninety (90) days unless a timely appeal or writ is filed in regard to this determination.¹²

This appeal followed.

Appellants' three points of trial court error are premised upon the trial court's denial of their motion to stay litigation and compel arbitration. In their first point on appeal, Appellants assert all of the parties in this matter were bound to arbitrate under the Amway arbitration provisions, as set out in the Amway Rules of Conduct, because the subject matter of each of Respondents' claims was within the scope of that provision. Specifically, Appellants maintain...